PERFORMANCE AUDIT REPORT
Kansas State Employee Health Plan:
Evaluating the State’s Pharmacy
Benefit Management System
A Report to the Legislative Post Audit Committee
By the Legislative Division of Post Audit
State of Kansas
Februrary 2015
R-15-002
Legislative Division of Post Audit
The Legislative Division of Post Audit is the audit
arm of the Kansas Legislature. Created in 1971,
the division’s mission is to conduct audits that
provide the Legislature with accurate, unbiased
information on the performance of state and local
government. The division’s audits typically examine
whether agencies and programs are effective in
carrying out their duties, efficient with their
resources, or in compliance with relevant laws,
regulations and other requirements.
The division’s audits are performed at the direction
of the Legislative Post Audit Committee, a
bipartisan committee comprising five senators and
five representatives. By law, individual legislators,
legislative committees, or the Governor may
request a performance audit, but the Legislative
Post Audit Committee determines which audits will
be conducted.
Although the Legislative Post Audit Committee
determines the areas of government that will be
audited, the audits themselves are conducted
independently by the division’s professional staff.
The division’s reports are issued without any input
from the committee or other legislators. As a result,
the findings, conclusions, and recommendations
included in the division’s audits do not necessarily
reflect the views of the Legislative Post Audit
Committee or any of its members.
The division conducts its audit work in accordance
with applicable government auditing standards set
forth by the U.S. Government Accountability Office.
These standards pertain to the auditor’s
professional qualifications, the quality of the
audit, and the characteristics of professional
and meaningful reports. The standards also
have been endorsed by the American
Institute of Certified Public Accountants
(AICPA) and adopted by the Legislative Post
Audit Committee.
LEGISLATIVE POST AUDIT COMMITTEE
Representative John Barker, Chair
Representative Tom Burroughs
Representative Peggy Mast
Representative Virgil Peck, Jr.
Representative Ed Trimmer
Senator Michael O’Donnell, Vice-Chair
Senator Anthony Hensley
Senator Laura Kelly
Senator Jeff Longbine
Senator Julia Lynn
LEGISLATIVE DIVISION OF POST AUDIT
800 SW Jackson
Suite 1200
Topeka, Kansas 66612-2212
Telephone: (785) 296-3792
Fax: (785) 296-4482
Website: http://www.kslpa.org
Scott Frank, Legislative Post Auditor
HOW DO I REQUEST AN AUDIT?
By law, individual legislators, legislative committees, or the Governor may request an audit, but
any audit work conducted by the division must be directed by the Legislative Post Audit
Committee. Any legislator who would like to request an audit should contact the division directly
at (785) 296-3792.
The Legislative Division of Post Audit supports full access to the services of state government for all citizens. Upon
request, the division can provide its audit reports in an appropriate alternative format to accommodate persons with
visual impairments. Persons with hearing or speech disabilities may reach the division through the Kansas Relay
Center at 1-800-766-3777. The division’s office hours are 8:00 a.m. to 5:00 p.m., Monday through Friday.
This audit was conducted by Laurel Murdie, Brad Hoff, Danielle Stephen, and Kristen
Rottinghaus. Chris Clarke was the audit manager. If you need any additional information
about the audit’s findings, please contact Laurel Murdie at the Division’s offices.
Legislative Division of Post Audit
800 SW Jackson Street, Suite 1200
Topeka, Kansas 66612
(785) 296-3792
Website: www.kslpa.org
Table of Contents
Question 1: Does the State Have Sufficient Controls in Place to Minimize State Costs and Enhance
Employee Benefits Through its Pharmacy Benefits Manager?
Because a Pharmacy Benefit Manager Controls Many Aspects of the Prescription Benefit Plan, There is a
Risk That it May Not Manage the Program in the State’s Best Interest................................................... 9
The Kansas State Employees Health Care Commission Has Negotiated Strong Contractual Provisions,
But KDHE Does Little to Verify Caremark’s Compliance with Those Terms ......................................... 11
KDHE Does Not Adequately Check Claims Data for Spread Pricing ......................................................... 13
Although Ensuring the State Receives its Share of Drug Rebates is Difficult, KDHE does Little to Monitor
Caremark’s Compliance ......................................................................................................................... 14
The State Does Little to Independently Verify How the State Employee Prescription Drug Formulary is
Managed ................................................................................................................................................ 15
The State Does Not Take Steps to Ensure it Receives all Claim Recoupments that Caremark Collected
From Pharmacies ................................................................................................................................... 16
The State’s Contract with Caremark Includes Few Controls Related to Mail-Order Prescriptions, However,
State Spending for Mail-Order is Minimal .............................................................................................. 17
Conclusion ................................................................................................................................... 18
Recommendations ...................................................................................................................... 18
List of Figures
Figure OV-1: Summary of Costs for the Prescription Drug Plan Compared to the Total State Employee
Health Plan (in millions) ........................................................................................................................... 6
Figure OV-2: Summary of the Claims Payment Process for the State Employee Prescription Drug Plan .. 8
List of Appendices
Appendix A: Scope Statement................................................................................................................... 21
Appendix B: Cost-Controlling Strategies - State Employee Prescription Drug Plan (Unaudited) ............. 23
Appendix C: Agency Response ................................................................................................................. 25
Kansas State Employee Health Plan: Evaluating the State’s
Pharmacy Benefits Management System
The Kansas Department of Health Environment (KDHE) is
responsible for the day to day administration of the State Employee
Health Plan. CaremarkPCS Health (Caremark) is currently the
state’s pharmacy benefit manager for the Plan. As a pharmacy
benefit manager, Caremark is primarily responsible for processing
and paying prescription drug claims for state employees.
Pharmacy benefit managers generally are also responsible for
developing and maintaining a formulary (a list that specifies
particular medications that are approved to be prescribed under an
existing health plan), contracting with pharmacies, and negotiating
discounts and rebates with drug manufacturers. For these types of
services, the state pays Caremark a fixed administrative fee for
each claim it processes.
Recent reform efforts suggest that the traditional pharmacy benefit
management system creates opportunities for pharmacy benefit
managers to generate additional revenues that either increase state
costs or do not increase benefits to state employees. For example,
depending on a pharmacy benefit manager’s contract, it could
negotiate to pay pharmacies in its network less for certain drugs
than it charges the state.
Legislators have expressed interest in knowing whether Kansas has
established sufficient controls to ensure that its current pharmacy
benefit manager, Caremark, minimizes state costs and does not
generate additional revenues that do not increase benefits to state
employees.
This performance audit answers the following question:
1. Does the state have sufficient controls in place to minimize
state costs and enhance benefits through its pharmacy
benefits manager?
A copy of the scope statement for this audit approved by the
Legislative Post Audit Committee is included in Appendix A.
We took several steps to answer the question. We reviewed
literature to identify the risks associated with pharmacy benefit
management and asked KDHE officials to identify the controls
they have in place for each risk. To assess those controls’
effectiveness, we reviewed a sample of claims for state employee
prescriptions filled between April and June 2014. Specifically, we
compared how much the state paid Caremark to how much
Caremark paid selected pharmacies to determine whether those
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State Employee Health Plan: Pharmacy Benefits Management (R-15-002)
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February 2015
amounts were the same as required by contract. We also identified
steps KDHE takes to ensure the state received all the drug
manufacturers’ rebates it was entitled to. In addition, we reviewed
KDHE’s process for ensuring it receives funds that Caremark
recoups from pharmacies for disallowed claims. To help us
determine how well the state employee prescription drug formulary
is managed, we asked several pharmacists to review the formulary
for the state employee prescription drug plan and we also
compared it to other state formularies. Finally, for a nonprojectable sample of prescriptions, to determine if mail-order
prescriptions cost less, we compared the cost of filling those
prescriptions through mail-order to the cost of filling them at a
walk-in pharmacy.
We also reviewed KDHE’s internal controls, including reviewing
the steps officials take to ensure that Caremark complies with
contract provisions for the state employee prescription drug plan.
We conducted this performance audit in accordance with generally
accepted government auditing standards. Those standards require
that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. As part of the audit
standards, the U.S. Government Accountability Office requires us
to assess the sufficiency and appropriateness of computerprocessed data. To comply with this standard we performed data
reliability work on all electronic prescription drug claims data we
received.
We believe the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
Finally, though we do not believe that it affected our findings,
conclusions, or recommendations, we do want to call the reader’s
attention to one issue regarding auditor independence. Generally
accepted government auditing standards require that auditors and
audit organizations maintain independence so that their opinions,
findings, conclusions, judgments, and recommendations will be
impartial (and viewed as impartial) by reasonable and informed
third parties. Auditors should avoid situations that could lead
reasonable and informed third parties to conclude that the auditors
are not independent and thus are not capable of exercising
objective and impartial judgment on all issues associated with
conducting the audit and reporting on the work.
The reader should be aware that as a state agency, most employees
of the Legislative Division of Post Audit receive pharmacy
benefits under the State Employee Health Plan. Although any
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State Employee Health Plan: Pharmacy Benefits Management (R-15-002)
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February 2015
changes in the management of those benefits could have an impact
on the benefits our staff receive, we think this has not affected the
impartiality of our opinions, findings, conclusions, judgments, and
recommendations.
Our findings begin on page 9, following a brief overview of
pharmacy benefits for state employees.
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State Employee Health Plan: Pharmacy Benefits Management (R-15-002)
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February 2015
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State Employee Health Plan: Pharmacy Benefits Management (R-15-002)
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Overview of Pharmacy Benefits for Kansas’ State Employees
The State Employee
Health Plan Provides
Health Care Benefits to
About 92,000 State
Employees and Their
Dependents
The State Employee Health Plan provides health insurance
coverage for state employees, retirees, and their dependents. In
total, about 92,000 state employees and their dependents are
enrolled in the plan. The plan offers medical, dental, vision, and
prescription drug benefits. This audit focuses only on the
prescription drug plan.
The State Employee Health Plan is overseen by the Kansas
State Employees Health Care Commission. Established in
statute in 1984, the commission has five members. State law
specifies that the Secretary of Administration and Insurance
Commissioner serve on the commission and the Governor appoints
the other three members. The purpose of the commission is to
develop and implement the State Employee Health Plan. The
commission is responsible for determining the qualifications for
employees to participate in the plan, for negotiating contracts with
vendors for benefit services, and submitting cost projections for the
plan in coming years.
The Kansas State Employees Health Care Commission is assisted
by an employee advisory committee. This 21-member committee
includes current and former state employees who work with the
commission to represent the interests of state employees
participating in the health care plan.
The Kansas Department of Health and Environment (KDHE)
administers the daily operations of the State Employee Health
Plan. While the Kansas State Employees Health Care
Commission is responsible for overseeing the State Employee
Health Plan, KDHE is responsible for the day-to-day operations of
the plan. KDHE provides oversight of vendors to determine that
they meet all contractual requirements. In addition, KDHE is
responsible for ensuring that vendors submit any reports or data to
help the state manage the State Employee Health Plan.
In their role as program administrator, KDHE officials told us they
continue to use several of the cost-controlling strategies that were
in place during our 2010 audit of the state employee prescription
drug plan. As part of this audit, we asked KDHE officials to report
whether they are continuing to use these strategies and if they have
implemented any additional strategies. Appendix B lists these
cost-controlling strategies, which include reducing dispensing fees
and decreasing the number of prescription drugs covered for plan
members. All of the strategies listed in Appendix B are selfreported and unaudited.
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State Employee Health Plan: Pharmacy Benefits Management (R-15-002)
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The Prescription Drug
Portion of the State
Employee Health Plan
Costs About $80
Million Each Year
For calendar year 2013, Kansas’ state employee prescription drug
plan had total costs of about $80 million. These costs include both
state costs and member costs. Of this amount, the state paid about
80% of costs, or $65 million. Participants paid the remaining 20%
or $15 million.
Figure OV-1 below compares the total costs of the prescription
drug plan with the total costs of the State Employee Health Plan.
As the figure shows, total costs of the prescription drug plan have
remained relatively stable from 2009 to 2013. In addition, the
figure shows the prescription drug plan has comprised about 14%
to 17% of the State Employee Health Plan costs during that same
time period.
Figure OV-1
Summary of Costs for the Prescription Drug Plan
Compared to the Total State Employee Health Plan
(in millions)
$82.4
Total
State Employee
Health Plan Costs
(state + member)
$486.7
Percentage of
Prescription Drug
Costs to Total SEHP
Costs
17%
2010
$84.2
$494.0
17%
2011
$83.3
$532.0
16%
2012
$85.8
$567.4
15%
2013
$80.4
$565.7
14%
2014 (a)
$69.6
$554.4
13%
Calendar
Year
Cost of
Prescription Drugs
2009
(a) Through November 2014.
Source: LPA summary of KDHE data (unaudited).
Caremark is the
Pharmacy Benefit
Manager for the
Prescription Drug Plan
Since 2006, the Kansas State Employees Health Care Commission
has contracted with CaremarkPCS Health (Caremark) to provide
pharmacy benefit manager services to the state employee
prescription drug plan. The current contract term is for three
calendar years and expires at the end of calendar year 2016.
Caremark provides a number of prescription management
services as the state’s pharmacy benefit manager. In general,
Caremark is responsible for providing administrative and support
services for the prescription drug plan. Major services Caremark
provides include:
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
Caremark has established a network of pharmacies where plan
members can fill their prescriptions. Caremark is required to
partner with pharmacies throughout the state and country to ensure
members have access and can fill prescription drugs through both
walk-in and mail-order pharmacies.

Caremark negotiates drug rebates on brand-name drugs and
administers the plan’s preferred drug list (formulary). Rebates
are discounts on prescription drug costs negotiated directly with drug
manufacturers. Caremark works directly with drug manufacturers to
receive these rebates and is required by contract to return 100% of
these rebates to the state.
In addition, Caremark creates and maintains a drug formulary. The
formulary is a list of prescription drugs approved for use and covered
by the prescription drug plan. It includes both brand-name and
generic drugs. As the pharmacy benefit manager, Caremark
provides KDHE with recommendations on which prescription drugs
to include on the formulary to ensure cost effectiveness and
availability of generic drugs.

Caremark pays and processes prescription drug claims. Figure
OV-2 on the next page summarizes the claims payment process for
the state employee prescription drug program. As Figure OV-2
shows, once a claim has been approved, Caremark must promptly
pay the pharmacy for filling the prescription. After paying the
pharmacy, Caremark processes the claim and sends it to the state
for reimbursement. As of October 2014, Caremark processed about
one million claims for the 2014 plan year. In addition to paying
Caremark the state portion of the prescription drug cost, Kansas
pays Caremark $.90 for each claim it processes.
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State Employee Health Plan: Pharmacy Benefits Management (R-15-002)
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Figure OV-2
Summary of the Claims Payment Process
for the State Employee Prescription Drug Plan
Employee and Other Participants
* Drop off prescription to pharmacy
* Pays the co-insurance
* Receives prescription drug
Pharmacy
* Enters claim into
Caremark system
* Dispenses prescription drug
to the employee
Drug Wholesaler
* Sells and sends
prescription drugs to
network pharmacies
Claim
Caremark
* Determines allowed
amount for drug claim
including rebate amount
* Pays pharmacy the cost of
the prescription drug
* Invoices the state showing
cost of claims processed
Claim
Kansas Health Care Commission
* Reimburses Caremark for
pharmacy claim invoices and pays
an administrative fee per claim
KDHE
* Monitors contract between
Health Care Commission
and Caremark for
compliance
Source: LPA summary of the state employee prescription drug plan
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State Employee Health Plan: Pharmacy Benefits Management (R-15-002)
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Question 1: Does the State Have Sufficient Controls in Place to Minimize
State Costs and Enhance Employee Benefits Through its Pharmacy Benefits
Manager?
Because a pharmacy benefit manager controls many aspects of the
prescription drug plan, there is a risk that it may not manage the
program in the state’s best interest (p. 9). The Kansas State
Employees Health Care Commission has negotiated strong
contractual provisions to protect against those risks, but KDHE
does little to verify Caremark’s compliance with those terms (p.
11). Specifically, the state does not adequately check claims data
for spread pricing (p. 13), does little to ensure it receives its share
of drug rebates (p. 14), and does little to independently verify how
the drug formulary is managed (p. 15). In addition, KDHE does
not take steps to ensure it receives all claim recoupments that
Caremark collected from pharmacies (p. 16). Finally, we also
found that the state’s contract with Caremark includes few
controls related to mail-order prescriptions; however state
spending for mail-order is minimal (p. 17).
Because a Pharmacy
Benefit Manager
Controls Many Aspects
of the Prescription
Benefit Plan, There is a
Risk That it May Not
Manage the Program in
the State’s Best Interest
Caremark is the pharmacy benefit manager for the State Employee
Health Plan. Caremark’s primary role is to provide administrative
services for the prescription drug portion of the plan. Some of
these services include processing claims, providing a broad
network of pharmacies and contracting with manufacturers for
drug rebates. These services are meant to provide the best
prescription coverage to members with the lowest cost to the state.
However, our review of literature and recent court cases indicate
that using a pharmacy benefit manager comes with certain risks.
These risks are more fully explained in the following sections.
Using a pharmacy benefit manager is a convenient way for
employers to ensure access to prescription drug benefits.
Typically, a pharmacy benefit manager handles most aspects of
administering a prescription drug plan. This includes developing
and contracting with a large network of pharmacies, negotiating
rebates with drug manufacturers, developing and maintaining a
prescription drug formulary, and processing prescription drug
claims. Having one entity handle all these services on behalf of an
employer is a convenience and can also be a source of cost
savings.
However, a pharmacy benefit manager is in a position to
potentially manipulate the prescription drug plan in several
ways to enhance its profits. While it is convenient to have one
entity to administer prescription drug benefits, allowing one party
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State Employee Health Plan: Pharmacy Benefits Management (R-15-002)
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to control so many aspects of a system also creates several risks.
Our review of literature showed these risks include the following:

Spread pricing may occur if a pharmacy benefit manager
charges the state more than it pays the pharmacy for a
prescription drug claim. In turn, the pharmacy benefit manager
profits by keeping the difference. As discussed next, drug
manufacturer rebates which are applied at the point-of-sale, can
make it more difficult to determine whether a pharmacy benefit
manager is using spread pricing.

Rebate savings may not be passed on to the state in full.
Rebates are paid by drug manufacturers directly to pharmacy benefit
managers in exchange for placing drugs in a preferred place on the
drug formulary. Because pharmacy benefit managers negotiate the
rebates and the resulting agreements are proprietary, there is
considerable risk that the pharmacy benefit manager could keep at
least a portion of the rebates.

The formulary for prescription drugs may be managed to benefit
the pharmacy benefit manager rather than the state or its
employees. Typically, the pharmacy benefit manager plays a
significant role in determining which drugs will be on an insurance
plan’s prescription drug formulary. A pharmacy benefit manager
may prefer a certain brand-name drug over other drugs or generic
equivalents because of the rebates it can generate. This may result
in the formulary not having the lowest cost drugs. Further, as
explained in the previous bullet, there is a risk that the pharmacy
benefit manager may not pass on these rebate savings to the state.

Payments recouped from pharmacies may not be passed on to
the state. Recoupments are claims the pharmacy benefit manager
originally pays to the pharmacy and charges to the state, but later
recoups from the pharmacy because the claim was not submitted
properly. The risk is that the state is never reimbursed for the
recouped claim.

Mail-order prescriptions can allow a pharmacy benefit manager
an additional opportunity to increase its profits. The risk is the
pharmacy benefit manager can charge more for prescriptions filled
through mail-order as compared to prescriptions filled at a walk-in
pharmacy.
While the state cannot fully eliminate these risks, it can
mitigate them through a combination of good contractual
provisions and regular monitoring activities. Steps to mitigate
the risks associated with using a pharmacy benefit manager include
the following:

The state’s contract should have provisions which require the
pharmacy benefit manager to manage prescription drug
benefits in a way that benefits the state and covered employees.
For example, the contract should clearly define key terms, require
periodic reporting, and allow for independent verification through
audits.
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State Employee Health Plan: Pharmacy Benefits Management (R-15-002)
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
The state should also monitor whether the pharmacy benefit
manager complies with contract provisions. For example, the
state should periodically take steps to independently verify
prescription drug claim pricing and payments and occasionally
conduct audits of drug manufacturer rebates.
The Kansas State Employees Health Care Commission is
responsible for developing and implementing the State Employee
Health Plan, including providing for prescription drug benefits.
The commission has contracted with Caremark to provide
pharmacy benefit management services. On a day to day basis, the
Kansas Department of Health Environment (KDHE) is responsible
for administering the State Employee Health Plan. This includes
monitoring to ensure contract performance/compliance.
The Kansas State
Employees Health Care
Commission Has
Negotiated Strong
Contractual Provisions,
But KDHE Does Little
to Verify Caremark’s
Compliance with Those
Terms
The Kansas State Employees Health Care Commission has
included numerous contractual provisions to reduce the risks
associated with using a pharmacy benefit manager. The state’s
contract includes multiple provisions to help decrease such risks.
For example, the state’s current contract with Caremark includes
the following provisions:

To mitigate spread pricing, the contract defines pricing terms and
requires that Caremark pay pharmacies the same amount that it
charges the state for prescription drug claims. Further, the contract
allows for auditing prescription drug claims.

To help ensure the state receives all drug rebates, the contract
defines rebates and requires Caremark to provide the state with
100% of rebates received from drug manufacturers. The contract
also allows the state to hire a third-party to review rebate
agreements between Caremark and drug manufacturers.

To help ensure the drug formulary is managed in such a way to
benefit the state and its employees, Caremark must provide the
state notice of any proposed and actual changes to the formulary.
Caremark’s formulary recommendations are subject to the approval
of KDHE as the day-to-day administrator of the State Employee
Health Plan.

To help ensure the state receives all recouped claims payments
from pharmacies, the contract requires Caremark to pay all
recouped funds to the state.
While most of the contract provisions are strong, there is one area
of weakness having to do with mail-order prescriptions. If the
state wants to help ensure that mail-order prescriptions cost less
than prescriptions filled at walk-in pharmacies, it would have to
add such a provision to its contract with Caremark. We discuss
mail-order prescriptions in more detail on page 17.
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State Employee Health Plan: Pharmacy Benefits Management (R-15-002)
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As the administrator of the contract, KDHE does not routinely
take the steps needed to verify that Caremark is complying
with its contractual provisions. Without regular monitoring, the
state cannot ensure that Caremark is managing the state employee
prescription drug plan in a way that most benefits the state and
insured employees.
Here is a summary of the problems we found:

KDHE does not adequately check claims data for spread pricing
(page 13).

Although ensuring the state receives its share of drug rebates is
difficult, KDHE does little to monitor Caremark’s compliance (page
14).

KDHE does little to independently verify how the state employee
prescription drug formulary is managed (page 15).

KDHE does not take steps to help ensure it receives all claim
recoupments that Caremark collects from pharmacies (page 16).

The state’s contract with Caremark includes few controls related to
mail-order prescriptions, however state spending for mail-order is
minimal (page 17).
These are discussed more fully in the sections that follow.
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FINDINGS FOR SPECIFIC RISK AREAS
KDHE Does Not
Adequately Check
Claims Data for Spread
Pricing
Because spread pricing has the potential to affect every claim,
it represents a significant risk to the state that needs to be
addressed. Spread pricing occurs when a pharmacy benefit
manager charges the state more than it pays the pharmacy for a
prescription drug claim. Because of the number of claims
processed each year, it would not take much to generate significant
profits through spread pricing. For example, if the pharmacy
benefit manager marks up just $1 for every prescription drug claim
processed during a typical calendar year, it could generate $1.3
million in revenue. To reduce the risk of spread pricing, the state’s
contract does not allow Caremark to pay pharmacies less than what
the state pays Caremark for prescription drugs. However, in
addition to having these types of provisions in its contract, the state
also needs to take steps to monitor and ensure that spread pricing is
not happening.
The state only occasionally audits claims for spread pricing,
and when it does, it does not independently verify Caremark’s
information. In addition to prohibiting spread pricing, the state’s
contract with Caremark allows the state to annually audit
prescription drug claims data. However, the last audit of claims
data was completed in 2011. In addition to being four years old,
the 2011 audit relied exclusively on unverified data from Caremark
regarding its payments to the pharmacies. In other words, the state
used Caremark’s self-reported information as evidence that
Caremark had complied with the contract.
The only way for the state to truly check for spread pricing is to
compare Caremark’s data to the records independently maintained
by individual pharmacies. KDHE would need to periodically
compare the state’s payments to Caremark for a sample of
prescription drug claims to separate payment information obtained
directly from the pharmacies. This comparison is necessary
because without reviewing pharmacy data, KDHE cannot verify
what Caremark paid and whether Caremark is following the
contract provisions that prohibit spread pricing.
Although KDHE’s monitoring for spread pricing is weak, our
analysis of 259 prescription drug claims found no evidence of
spread pricing. To independently test Caremark’s compliance
with the provisions regarding spread pricing, we obtained claims
records from individual pharmacies for 259 prescription drug
claims from April 2014 to June 2014. We compared what
Caremark paid pharmacies to the amount that the state paid
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Caremark. Because the sample was not randomly drawn, our
results are not statistically projectable.
Although Ensuring the
State Receives its Share
of Drug Rebates is
Difficult, KDHE does
Little to Monitor
Caremark’s
Compliance

For 224 of 259 claims (86%) Caremark charged the state exactly
the same amount that it paid the pharmacies. For these claims,
Caremark clearly met the contract requirement that prohibits spread
pricing. This is nearly consistent with the findings in our 2004 audit
of the state employee prescription drug plan, in which we did not find
any instances of spread pricing.

For the remaining claims (35 of 259) Caremark appeared to
charge the state less than it paid the pharmacies, though this
may be due to inadequate information regarding drug rebates.
For example, the records for one claim showed the state paid
Caremark $54 to fill a prescription for Dexilant, while Caremark paid
the pharmacy $159. This would indicate that Caremark actually lost
$105 on the transaction. However, officials from both Caremark and
KDHE told us the $105 difference was likely covered by a rebate
from the drug manufacturer. Because Caremark’s specific rebate
agreements with the drug manufacturers are proprietary, we were
unable to confirm whether rebates were the reason such claims
looked like overpayments to pharmacies.
Rebates are paid by drug manufacturers in exchange for placing
drugs in a preferred place on the formulary. A drug formulary is
simply a list of medicines that are covered by a prescription drug
plan. Rebates act essentially like a coupon toward the cost of
brand-name drugs and help lower the price paid by the insured
member and the state. Our audit work included identifying any
steps the state takes to ensure it receives all drug rebates it is
entitled to.
Monitoring drug manufacturer rebates is important because
rebates often total in the millions of dollars, and it can be easy
for pharmacy benefit managers to keep them. Rebates are paid
directly to pharmacy benefit managers in exchange for placing
drugs in a preferred place on a drug formulary. However, because
pharmacy benefit managers directly negotiate the rebates and the
resulting agreements are considered proprietary, there is
considerable risk that the pharmacy benefit manager could keep at
least a portion of the rebates. This is why it is important for the
state to monitor to help ensure it receives all rebates.
However, monitoring drug rebates is difficult because drug
manufacturers consider rebate information proprietary. The
total amount of drug rebates the state is entitled to is primarily
determined by Caremark’s contracts with the various drug
manufacturers. Getting that information is difficult. First, those
agreements likely affect many of Caremark’s clients, not just the
Kansas State Employee Health Plan. Second, because rebate
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agreements are considered proprietary neither we, nor KDHE can
easily determine whether the state received all drug manufacturer
rebates as required by contract.
The exact total in drug rebates that Kansas received from
Caremark is also considered proprietary. While we cannot report
the exact amount, we can generally report that the state received
significantly more than the minimum total drug rebate guaranteed
by contract in each of the past three calendar years. However, that
does not mean Kansas received the maximum amount possible (all
rebates).
Even so, KDHE has not taken proactive steps to verify rebate
amounts. To mitigate the risk that Caremark may not pass all
rebate savings back to the state, the term “rebate” is defined in
contract, and Caremark is required to pass all rebates savings on to
the state. In addition, the contract allows the state to hire a thirdparty to audit drug manufacturers’ agreements with Caremark.
Despite those provisions, the state relies solely on an annual rebate
reconciliation report prepared by Caremark to determine whether it
has received all the drug rebates it should. The report shows the
minimum rebate amounts guaranteed to the state at the point-ofsale (at the pharmacy) and the rebate amounts Caremark returned
to the state. The report does not include details about how much in
total rebates Caremark received directly from drug manufacturers.
KDHE officials told us that because the state received at least the
minimum guaranteed by contract, they did not take any steps to
verify rebate amounts provided by Caremark.
KDHE officials told us they plan to audit drug rebates during
calendar year 2015. To date, KDHE has not audited the amount
of rebates applied at the point-of-sale nor audited rebates amounts
provided directly to Caremark. KDHE officials said the audit
planned for calendar year 2015 will include the top five (by
volume and cost) drug manufacturer arrangements with Caremark,
and will include reviewing point-of-sale rebates guaranteed and
paid by Caremark.
The State Does Little to
Independently Verify
How the State
Employee Prescription
Drug Formulary is
Managed
Scrutiny of proposed formulary changes is important because
a pharmacy benefit manager could manage the formulary in
such a way to benefit itself more than the state. The drug
formulary is simply a list of medicines that are covered by a
prescription drug plan. As the pharmacy benefit manager,
Caremark is responsible for providing KDHE with
recommendations on how to best manage the formulary.
Specifically, the state’s contract requires Caremark to provide an
evidence-based drug access plan, which includes suggesting when
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to add new cost-effective prescription drugs and ensuring that all
available generics are included.
Having a pharmacy benefit manager make formulary
recommendations is not a problem if the state receives all rebates
that result from those formulary recommendations. However,
because the pharmacy benefit manager directly negotiates rebates
with drug manufacturers and the resulting agreements are
considered proprietary, it is easily in the position to benefit from
any formulary changes it suggests.
Despite the contract giving KDHE the final say on any
formulary changes, Kansas relies primarily on Caremark’s
recommendations. On a quarterly basis, Caremark provides
written recommendations to KDHE with suggestions for managing
the formulary. In turn, KDHE officials decide whether to approve
or reject the recommended changes. However, officials conceded
that nearly all formulary recommendations made by Caremark are
approved. Further, although KDHE has contracted with Aon
Consulting (Aon), a third-party consultant, whose primary role is
helping KDHE manage the state employee prescription drug
formulary, KDHE has not asked for Aon’s help in reviewing the
formulary as much as we would have expected. KDHE officials
estimated that in the past three years, they have only asked Aon to
review such changes two or three times in total.
Finally, our review showed that KDHE has not always taken steps
to verify Caremark’s assertion that certain brand-name drugs
should be on Kansas’ formulary because they are more cost
effective than other brand-name drugs. For example, Kansas’
formulary includes the insulin products Novalog and Novolin, but
not Humalog. KDHE officials told us that Caremark
recommended the Novalog and Novolin brands because those
brands were more cost effective than Humalog. KDHE
acknowledged they did not ask Caremark to produce details to
verify that assertion.
The State Does Not
Take Steps to Ensure it
Receives all Claim
Recoupments that
Caremark Collected
from Pharmacies
As part of the contract with the state, Caremark is responsible for
performing claim recoupment audits at pharmacies. Each time a
prescription drug is purchased, the claim is processed
electronically at the pharmacy. Caremark later goes back and
checks a sample of claims for accuracy. If any claims are
determined to be inaccurate, Caremark can recoup the payment it
made to the pharmacy. The following is a summary of our
findings related to claim recoupments:
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The State’s Contract
with Caremark Includes
Few Controls
Related to Mail-Order
Prescriptions,
However, State
Spending for MailOrder is Minimal

There is a risk that payments recouped from pharmacies may
not be passed to the state. The purpose of recoupment audits is to
determine whether the pharmacy had a valid physician order for the
prescription and to ensure it was properly dispensed. If not,
Caremark recoups the claims payment from the pharmacy. The
state’s contract requires Caremark to return all recouped funds to the
state. When we started the audit, several pharmacists we spoke
with mentioned this as a big area of concern.

The state does not verify whether Caremark has provided all the
funds it has recouped from pharmacies. During our work, we saw
evidence that Caremark was conducting recoupments audits. Some
resulted in funds being recouped, while others did not. For calendar
years 2013 and 2014, Caremark provided the state with a total of
$4,300 and $13,000 respectively, in claims payments recouped from
pharmacies. However, up until now KDHE officials have not taken
steps to verify whether Caremark had provided the state with all the
recouped funds that it should.

Total claims recouped from pharmacies likely does not merit
the state spending significant resources to ensure that state
receives all that it should. We were unable to find an industry
standard that would help us estimate about how much the state
should expect to receive in claim recoupments. However, if
Caremark only audits about 1 to 2% of claims costs each year and if
only 5% of those claims were recouped, the potential amount
recouped would be only about $65,000. KDHE has the ability to
request detailed reports regarding the recoupments. KDHE could
use this information to help verify whether the recoupments received
from Caremark match the amounts shown in reports. This is not an
ideal way to determine if Caremark provided the state with all
recoupments, but it also does not require much effort.
State employees and family members enrolled in the state’s
prescription drug plan have the option to use a mail service when
filling prescriptions. Generally, mail-order pharmacies offer
prescriptions at lower costs and can be a convenient way to fill
prescriptions. The following is a summary of our findings related
to mail-order prescriptions:

There is a risk that the pharmacy benefit manager will charge
more for mail-order prescriptions. Our review of literature showed
the risk is that a pharmacy benefit manager can charge more for
prescriptions filled through mail-order as compared to prescriptions
filled at a walk-in pharmacy.

The state does not have controls related to mail-order
prescriptions. As mentioned earlier, there are no provisions in the
state’s contract with Caremark that require mail-order prescriptions
to cost less than prescriptions filled at walk-in pharmacies. In
addition, KDHE officials do not monitor whether mail-order
prescriptions actually cost less.
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Conclusion

The lack of controls is not a significant issue because mailorder prescriptions comprise a very small portion of total
prescription drug costs. Mail-order prescriptions account for only
about $800,000 of total annual state employee prescription drug
costs (1%). In addition, we reviewed 1,029 mail-order claims for
some of the most expensive drug prescriptions filled from April 2014
through June 2014. On average, mail-order prescriptions were less
expensive than the same prescription filled at a walk-in pharmacy.

Because mail-order prescriptions are a small portion of total
costs, there is little reason to dedicate additional state
resources at this time. However, it will be important for KDHE to
occasionally monitor the total cost of mail-order prescriptions. If the
costs become a significant portion of total costs, the state will want to
consider whether it should do more to ensure that mail-order
prescriptions cost less than when filled at walk-in pharmacies.
Like so many employers, it is convenient for the state to contract
with a pharmacy benefit manager to administer its state employee
prescription drug insurance plan. Pharmacy benefit managers
provide a wide range of services, including negotiating drug prices
and rebates with drug manufacturers, processing prescription drug
claims for insured employees, establishing a contracted network of
pharmacies, and managing the prescription drug formulary.
However, because pharmacy benefit managers control so many
aspects of the prescription drug process, they are also in the
position to manage prescription drug plans in ways that financially
benefit them and not the state or its employees. Without
meaningful oversight that includes verifying compliance with
contractual provisions, there are many opportunities for a
pharmacy benefit manager to financially benefit at the state’s
expense.
While it is very encouraging that we found no evidence that
Caremark has violated any contract requirements related to the
state employee prescription drug plan, it is still concerning that the
Kansas State Employees Health Care Commission and KDHE do
little to monitor Caremark’s compliance with the contract. The
state has handed over most of the key components of the
prescription drug plan to Caremark and is simply trusting that
Caremark will honor all the terms of its contract and act in the
state’s best interest.
Recommendations for
Executive Action
1. To address the issues with the state’s monitoring of spread
pricing, the Kansas State Employees Health Care Commission
and KDHE should include terms in its contract with the
pharmacy benefit manager that would allow KDHE to
periodically request data directly from pharmacies and test for
spread pricing (pages 13-14).
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2. To address the issues with the state’s monitoring of drug
manufacturer rebates, the Kansas State Employees Health Care
Commission and KDHE should (pages 14-15):
a. Develop benchmarks to assess whether the total rebate
amount received from its pharmacy benefit manager is
generally reasonable.
b. Develop a process to verify whether the claims figures used
by the pharmacy benefit manager to calculate the state’s
point-of-sale rebates is correct.
c. Contract with a third-party to periodically audit rebate
amounts that the pharmacy benefit manager receives from
drug manufacturers to ensure that the state receives the
total amount of drug rebates to which it is entitled.
3. To address the issues regarding the state employee prescription
drug formulary, the Kansas State Employees Health Care
Commission and KDHE should regularly have a third-party
conduct independent reviews of the pharmacy benefit
manager’s formulary recommendations to determine whether
they are cost effective and in the best interest of the state and
its employees (pages 15-16).
4. To address the issues regarding mail-order prescriptions, the
Kansas State Employees Health Care Commission and KDHE
should monitor the number of mail-order prescription drug
claims. If the share of these claims increases significantly, they
should consider auditing the cost of mail-order prescription
drug claims to ensure they cost less than prescriptions filled at
walk-in pharmacies (pages 17-18).
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APPENDIX A
Scope Statement
This appendix contains the scope statement approved by the Legislative Post Audit Committee
for this audit on April 29, 2014. The audit was requested by Representative Peggy Mast.
Kansas State Employee Health Plan: Evaluating the State’s Pharmacy Benefits
Management System
CVS Caremark is currently the state’s pharmacy benefit manager (PBM) for the State Employee
Health Plan. As a PBM, CVS Caremark is primarily responsible for processing and paying
prescription drug claims for state employees. PBM’s are generally also responsible for
developing and maintaining a formulary (a list that specifies particular medications that are
approved to be prescribed under an existing health plan), contracting with pharmacies, and
negotiating discounts and rebates with drug manufacturers. For these types of services, the state
pays CVS Caremark a fixed administrative fee for each claim it processes.
Recent reform efforts suggest that the traditional pharmacy benefit management system creates
opportunities for PBMs to generate additional revenues that ether increase state costs or do not
increase benefits to state employees. For example, depending on a PBM’s contract, a PBM could
negotiate to pay pharmacies in its network less for certain drugs than it charges the state.
Similarly, some PBM’s maintain their own mail-order pharmacies which could create a conflict
of interest.
Legislators have expressed interest in knowing whether Kansas has established sufficient
controls to ensure that its current PBM, CVS Caremark, minimizes state costs and does not
generate additional revenues that do not increase benefits to state employees.
A performance audit in this area would address the following question:
1. Does the state have sufficient controls in place to minimize state costs and enhance
employee benefits through its pharmacy benefits manager? To answer this question, we
would review PBM reform literature to identify ways in which the traditional PBM system
can create inefficiencies or reduce employee benefits. We would also interview officials
from the Health Care Commission and the Department of Health and Environment to
determine whether they thought these potential risks were relevant in Kansas. Based on that
information, we would work with State Employee Health Plan staff to determine what
controls currently exist to mitigate these potential issues. Specifically, we would evaluate the
state’s PBM procurement process, its current contract with CVS Caremark, and any
oversight mechanisms established to ensure the contract was being followed as designed. We
would perform additional work in this area as necessary.
Estimated Resources:
Estimated Time:
(a)
3 LPA staff
3 months
From the audit start date to our best estimate of when it would be ready for the committee.
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APPENDIX B
Cost-Controlling Strategies
State Employee Prescription Drug Plan (Unaudited)
This appendix contains a listing of cost-controlling strategies that KDHE officials reported they
have implemented for the state employee prescription drug plan.
Appendix B
Cost-Controlling Strategies KDHE Officials Report Having Implemented for the
State Employee Prescription Drug Program (Unaudited)
Increase the Maximum Day Supply of Maintenance Drugs: Increase the maximum supply of maintenance
drugs from 30 days to either 60 or 90 days to reduce the overall dispensing fees paid. On Plan A, the
maximum day supply remains 60 days, while Plan C has a maximum of 90 days. Maintenance drugs are any
medication taken over an extended period of time to treat a chronic disease or condition. Despite the larger
day supplies available, the overall day supply purchased remains on average in the 28 day range.
Check Claims Data Accuracy: Routinely check accuracy of claims processing (paying correct amount,
paying for covered prescriptions, etc.), and ensure staff have the training and tools needed to conduct these
checks. If necessary, collect any penalties due from the vendor if claims are paid to ineligible individuals.
Check Beneficiary Eligibility: Along with Caremark, cross-check eligibility accuracy, ensure complete
updates are made on a timely basis, and check whether claims were paid for ineligible people.
Collect Penalties for Not Meeting Performance Guarantees: Collect payment and penalties from Caremark
for not meeting certain performance guarantees that are included in the contract.
Reduce Drugs Covered: Reduce the number of drugs covered under the State Employee Health Plan.
Reduce Dispensing Fees: Reduce fees paid to pharmacies for every prescription dispensed. The current
dispensing fee is $.70 cents, which is a reduction from the previous contract.
Implement a Wellness Program: Discuss health issues with beneficiaries through a monthly newsletter
and administer wellness activities.
Implement Step Therapy Programs: Require beneficiaries to try a less expensive prescription drug option
before a more expensive alternative.
Monitor Members' Drug Usage and Provide After-the-Fact Training to Physicians: The State Employee
Health Program continues to have a drug utilization review program in place through Caremark to address
drug usage and to provide providers with coaching.
Allow Mail Order Prescription Drugs: Allow beneficiaries the option of receiving prescription drugs via mail
at a lower cost.
Use Prior Authorizations: Require a physician override before a patient can receive a more expensive nongeneric drug if a less expensive alternative is available.
Privatize the Prescription Drug Plan: Contract with a third-party, Caremark, to process claims and negotiate
prices to reduce the state's overhead costs.
Provide Counseling for Chronic Illness or Conditions: Require beneficiaries with chronic illnesses or
conditions to work with a case manager to determine the most appropriate treatment options.
Specialty Drug Mail-Order Program: Beginning in 2010, all specialty drugs must be purchased through
Caremark’s mail order specialty pharmacy. By moving to a sole source arrangement, KDHE was able to
negotiate with Caremark better pricing on these medications then what it would have been if using retail
pharmacies.
Specialty Guidelines Management: This requires all new prescriptions for specialty products be reviewed by
Caremark against national standards and protocols for the specialty drug use before the drug is dispensed.
Pharmacogenomics Program: For some of the new generation of prescription drugs, a member’s individual
genetic makeup will determine whether or not the medication will be effective for that member. Caremark,
using its broad basis of covered members, is able to negotiate discount fees for this specialized testing and
the State Employee Health Plan benefits from the discounted fees and by ensuring that medications
purchased under the plan will be effective for the member.
Source: Kansas Department of Health and Environment officials (unaudited)
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APPENDIX C
Agency Response
On January 30th, we provided copies of the draft audit report to the Kansas Department of Health
and Environment. Its response is included as this Appendix. Following the agency’s written
response is a table listing the department’s specific implementation plan for each
recommendation.
In its response, the agency stated that it found the report’s findings helpful and that it planned to
immediately implement additional controls.
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Itemized Response to LPA Recommendations
Kansas Department of Health and Environment - Kansas State Employee Health Plan: Evaluating the
State's Pharmacy Benefits Management System
LPA Recommendation
Agency Action Plan
1. To address the issues with the state’s monitoring of spread
pricing, the Kansas State Employees Health Care
Commission and KDHE should include terms in its contract
with the pharmacy benefit manager that would allow KDHE
to periodically request data directly from pharmacies and
test for spread pricing.
We do not feel this is an audit the SEHP can legally
undertake itself due to patient privacy issues. We will work
with the SEHP audit firm to determine a process that can
be implemented to review claims payments to pharmacies.
The auditors may encounter some difficulty as participation
by pharmacies would be voluntary and they may not elect
to provide this data to an outside third party out of respect
for their patient's privacy. The SEHP will include language
in the contract to allow for a third party audit firm to obtain
this information during a pharmacy audit.
Question 1
2. To address the issues with the state's monitoring of drug
manufacturer rebates, the Kansas State Employees Health
Care Commission and KDHE should:
a. Develop benchmarks to assess whether the total rebate The current contract has the amount of rebate that is
amount received from its pharmacy benefit manager is
guaranteed to be paid to the SEHP. The SEHP will work
generally reasonable.
with their pharmacy consultant to develop appropriate
benchmarks.
b. Develop a process to verify whether the claims figures
used by the pharmacy benefit manager to calculate the
state's point-of-sale rebates is correct.
The rebate applied at the point of sale are drug specific to
each strength and quantity dispensed. As such the POS
rebate is dependent on the rebate agreement and the drug
purchased. The contract provides for annual true ups of
any differences between the amount applied at the POS
and the actual rebate received by the PBM. The SEHP will
work with their audit firm to determine the appropriate
process to verify the POS rebates are correct.
c. Contract with a third-party to periodically audit rebate
A contract has already been approved by the HCC at the
amounts that the pharmacy benefit manager receives from December 2014 meeting. This will be part of the ongoing
drug manufacturers to ensure that the state receives the
audit process
total amount of drug rebates to which it is entitled.
3. To address the issues regarding the state employee
prescription drug formulary, the Kansas State Employees
Health Care Commission and KDHE should regularly have
a third-party conduct independent reviews of the pharmacy
benefit manager's formulary recommendations to
determine whether they are cost effective and in the best
interest of the state and its employees.
The SEHP currently utilizes their pharmacy consultant on
some of the formulary changes that are not considered
routine additions or deletions due to new to the market
drugs and new generic options. The SEHP will be sending
all formulary changes to the pharmacy consultant which
began with the fourth quarter 2014 changes.
4. To address the issues regarding mail-order prescriptions,
the Kansas State Employees Health Care Commission and
KDHE should monitor the number of mail-order
prescription drug claims. If the share of these claims
increase significantly, they should consider auditing the
cost of mail-order prescription drug claims to ensure they
cost less than prescriptions filled at walk-in pharmacies.
The SEHP will work with their pharmacy consultant to add
provisions to the contract to strengthen the mail-order
provisions. The mail-order prescriptions claims will be part
of the audit process.
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